SEC News Digest

Issue 2012-163 August 22, 2012

COMMISSION ANNOUNCEMENTS

SEC Adopts Rule for Disclosing Use of Conflict Minerals

The Securities and Exchange Commission today adopted a rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act to require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country.

The regulatory reform law directed the Commission to issue rules requiring certain companies to disclose their use of conflict minerals that include tantalum, tin, gold, or tungsten if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. Companies are required to provide this disclosure on a new form to be filed with the SEC called Form SD.

After proposing the rule in 2010, the Commission hosted a roundtable in October 2011 to assist in finalizing the rule.

“I am pleased that the Commission has finalized this very challenging project in such a thoughtful manner,” said SEC Chairman Mary L. Schapiro. “We have received significant public input on this rulemaking, and in response we incorporated many changes from the proposal that are designed to address concerns about the costs. I believe the final rule faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner.”

Under the final rule, issuers are required to file for the same period – a calendar year – regardless of when their fiscal year ends. Companies will file their first specialized disclosure report on May 31, 2014 (for the 2013 calendar year) and annually on May 31 every year thereafter. (Press Rel. 2012-163)

The Securities and Exchange Commission today adopted rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring resource extraction issuers to disclose certain payments made to the U.S. government or foreign governments.

The regulatory reform law directed the Commission to issue these rules requiring companies engaged in the development of oil, natural gas, or minerals to disclose the information annually by filing a new form with the SEC called Form SD.

Aresource extraction issuer is required to comply with the new rules for fiscal years ending after Sept. 30, 2013. The form must be filed with the SEC no later than 150 days after the end of its fiscal year. (Press Rel. 2012-164)

ENFORCEMENT PROCEEDINGS

SEC Charges New York-Based Firm and Owner in Penny Stock Scheme

The Securities and Exchange Commission today charged a New York-based firm and its owner with conducting a penny stock scheme in which they bought billions of stock shares from small companies and illegally resold those shares in the public market.

The SEC alleges that Edward Bronson and E-Lionheart Associates LLC reaped more than $10 million in unlawful profits from selling shares they bought at deep discounts from approximately 100 penny stock companies. On average, Bronson and E-Lionheart were able to generate sales proceeds that were approximately double the price at which they had acquired the shares. No registration statement was filed or in effect for any of the securities that Bronson and E-Lionheart resold to the investing public, and no valid exemption from the registration requirements of the federal securities laws was available.

“By violating the registration provisions of the securities laws and dumping billions of unregistered shares into the over-the-counter market, Bronson deprived investors of important information about the companies in which they were investing,” said Andrew M. Calamari, Acting Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Bronson lives in Ossining, N.Y. E-Lionheart, which also does business under the name Fairhills Capital, is located in White Plains. Acting at Bronson’s direction, E-Lionheart personnel systematically “cold called” penny stock companies quoted on the OTC Link to ask if they were interested in obtaining capital. If the company was interested, E-Lionheart personnel would offer to buy stock in the company at a rate that was deeply discounted from the trading price of the company’s stock at that time. Typically, Bronson and E-Lionheart immediately began reselling the shares to the investing public through a broker within days of receiving the shares from the company.

Bronson and E-Lionheart purported to rely on an exemption from registration under Rule 504(b)(1)(iii) of Regulation D, which exempts transactions that are in compliance with certain types of state law exemptions. However, no such state law exemptions were applicable to these transactions. Bronson and E-Lionheart claimed to rely on a Delaware state law registration exemption, but the transactions in fact had little or no connection to the state of Delaware. The particular Delaware state law exemption claimed by Bronson and E-Lionheart is not an exemption that meets the specific requirements of Rule 504(b)(1)(iii). As a result, investors purchasing these shares did not have access to all of the information that a registration statement would have provided, including in many instances important information concerning the issuance of millions of new shares by the company to Bronson and E-Lionheart.

The SEC’s complaint charges E-Lionheart and Bronson with violations of the registration provisions of the federal securities laws, and seeks disgorgement of more than $10 million in ill-gotten gains, penalties. The SEC also seeks penny stock bars against E-Lionheart and Bronson. The complaint also names another entity owned and controlled by Bronson – Fairhills Capital Inc. – as a relief defendant for the purpose of recovering the illegal proceeds it received.

The SEC’s investigation was conducted in the SEC’s New York Regional Office by Senior Attorney William Edwards and Assistant Regional Director Wendy B. Tepperman. The SEC’s litigation will be led by Senior Trial Counsel Kevin McGrath. (Press Rel. 2012-165)

In the Matter of in Orbit E-Commerce, Inc.

An Administrative Law Judge has issued an Order Making Findings and Revoking Registration by Default as to Pacificnet, Inc., (Default Order) in Orbit E-Commerce, Inc., Admin. Proc. No. 3-14881. The Order Instituting Proceedings (OIP) alleged that Pacificnet, Inc. (Pacificnet), repeatedly failed to file timely periodic reports while its securities were registered with the Securities and Exchange Commission. The Default Order finds these allegations to be true as to Pacificnet and revokes the registration of each class of its registered securities, pursuant to Section 12(j) of the Securities Exchange Act of 1934.

On June 27, 2012, the securities registrations of the other six named Respondents were revoked by default. See Orbit E-Commerce, Inc., Exchange Act Release No. 67268. (Rel. 34-67703; File No. 3-14881)

In the Matter of Todd C. Crow

On August 22, 2012, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings and Imposing Remedial Sanctions (Order) against Todd C. Crow (Crow). The Order finds that on July 23, 2012, a final judgment was entered by consent against Crow permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder in the civil action entitled SEC v. NutraCea, et al., Civil Action No. CV 11-0092-PHX-SRB, in the United States District Court for the District of Arizona. The Commission alleged in its complaint that NutraCea, through the misconduct of Crow and others, overstated its sales revenues for its fiscal year 2007 by engaging in improper revenue recognition practices. The complaint alleged that Crow violated the antifraud, books and records, and internal controls provisions of the federal securities laws because he knew or was reckless in not knowing that NutraCea improperly accounted for a $2.6 million sale in the second quarter of 2007 and a $1.9 million sale in the fourth quarter of 2007. The complaint further alleged that Crow signed false management representation letters to NutraCea’s auditors.

Pursuant to the Order, Crow is suspended from appearing or practicing before the Commission as an accountant. Crow consented to the issuance of the Order without admitting or denying the finding in the Order, except he admitted the entry of the injunction. (Rel. 34-67708; AAE Rel. 3402; File No. 3-14992)

In the Matter of MiddleCove Capital, LLC and Noah L. Myers

On August 22, 2012, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940 (the Order) against MiddleCove Capital, LLC (MiddleCove), an investment adviser registered with the Commission, and Noah L. Myers (Myers), the principal of MiddleCove.

The Division of Enforcement alleges that from approximately October 2008 to February 2011, Myers engaged in fraudulent trade allocation – “cherry-picking” – at MiddleCove. Myers executed his cherry-picking scheme by unfairly allocating trades that had appreciated in value during the course of the day to his personal and business accounts and allocating trades that had depreciated in value during the day to the accounts of his advisory clients. Myers did this by purchasing securities in an omnibus account and delaying allocation of the purchases until later in the day (and sometimes the next day), after he saw whether the securities appreciated in value. When a security appreciated in value on the day of purchase, Myers would often sell the security and disproportionately allocate the purchase and the realized day-trading profit to his own accounts or accounts benefiting himself or his family members. In contrast, for securities that did not appreciate on the day of purchase, Myers would disproportionately allocate these purchases to his clients’ accounts and his clients would hold the position for more than one day.

Myers carried out his cherry-picking scheme with regard to several securities, but was most active with an inverse and leveraged exchange traded fund (ETF). Myers finally ceased these practices in February 2011 when one of his employees threatened to contact the Commission. As a result of his fraud, Myers realized ill-gotten gains of approximately $460,000. Myers’s cherry-picking scheme also resulted in more than $2 million in client losses from his trading in the inverse and leveraged ETF. Neither MiddleCove nor Myers disclosed to clients that they were engaged in cherry-picking and that they would favor Myers’s accounts in the allocation of appreciated securities. In addition, Myers and MiddleCove failed to follow the policies stated in MiddleCove’s ADV concerning trade allocation.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide the Respondents an opportunity to dispute these allegations, and to determine what, if any, remedial sanctions are appropriate and in the public interest. The Order requires the Administrative Law Judge to issue an initial decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice. (Rels. 34-67709; IA-3448; IC-30179; File No. 3-14493)

Securities and Exchange Commission Orders Hearing on Registration Suspension or Revocation Against Six Public Companies for Failure to Make Required Periodic Filings

Today the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registrations of each class of the securities of six companies for failure to make required periodic filings with the Commission:

Feigeda Electronic Technology, Inc. (f/k/a SRKP 20, Inc.)

FirstQuote, Inc. (f/k/a Fine Line Properties, Inc.)

Flexemessaging.com, Inc. (n/k/a Flexemessaging Acquisition Ltd.)

Flomo Resources, Inc.

Formulab Neuronetics Corp. Ltd. (n/k/a Foundation Healthcare Ltd.)

Genesis Development & Construction Ltd.

In this Order, the Division of Enforcement (Division) alleges that the six issuers are delinquent in their required periodic filings with the Commission.

In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the Administrative Law Judge will hear evidence from the Division and the Respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The Administrative Law Judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these Respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-67710; File No. 3-14994)

INVESTMENT COMPANY ACT RELEASES

ReconTrust Company, N.A., et al.

The Commission has issued a temporary order to ReconTrust Company, N.A., et al. under Section 9(c) of the Investment Company Act of 1940 (Act) with respect to an injunction against ReconTrust Company, N.A. (ReconTrust) entered by the U.S. District Court for the Western District of Washington on August 20, 2012. The temporary order exempts ReconTrust, BofA Advisors, LLC, BofA Distributors, Inc., Bank of America Capital Advisors LLC, KECALP Inc. and Merrill Lynch Global Private Equity Inc. and any other companies of which ReconTrust is or becomes an affiliated person from the provisions of Section 9(a) of the Act until the Commission takes final action on an application for a permanent order. The Commission also has issued a notice giving interested persons until September 14, 2012,to request a hearing on the application filed by applicants for a permanent order under Section 9(c) of the Act. (Rel. IC-30174 – August 20)

SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by the EDGA Exchange, Inc. (SR-EDGA-2012-36) to terminate revenue sharing agreement has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of August 20. (Rel. 34-67693)

A proposed rule change filed by the EDGX Exchange, Inc. (SR-EDGX-2012-35) to terminate revenue sharing agreement has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of August 20. (Rel. 34-67694)

A proposed rule change filed by NYSE MKT LLC making certain conforming changes to its rules following the change in the Exchange’s name from NYSE Amex LLC to NYSE MKT LLC (SR-NYSEMKT-2012-38) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of August 20. (Rel. 34-67695)

A proposed rule change filed by NASDAQ OMX PHLX LLC relating to Rule 1014 (SR-Phlx-2012-108) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of August 20. (Rel. 34-67700)

A proposed rule change filed by NASDAQ OMX PHLX LLC (SR-Phlx-2012-107) regarding client information about agency orders of floor brokers has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of August 20. (Rel. 34-67701)

A proposed rule change filed by NYSE MKT LLC (SR-NYSEMKT-2012-43) amending the NYSE Amex Options LLC Limited Liability Company Agreement to eliminate certain restrictions relating to the qualification of Founding Firm Advisory Committee Members has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication in the Federal Register is expected during the week of August 20. (Rel. 34-67702)

SECURITIES ACT REGISTRATIONS

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.